RBA raises official interest rates by 0.5 per cent
New homeowners and those who want to buy have shared their disappointment in the Reserve Bank’s interest rate management after the fourth increase since May.
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Repayments on a $1m loan will be nearly $1000 a month higher than they were in April after an unprecedented fourth official interest rate increase in under 100 days.
However, some economists now believe the Reserve Bank of Australia’s run of 0.5 per cent hikes is over following the latest jump, from 1.35 per cent to 1.85 per cent.
The RBA’s decision to elevate the cash rate to a level not seen since April 2016 came as it faced more criticism over its handling of monetary policy, including from recent homebuyers and those who would like to buy a place of their own.
New mums Pillis Castro and Valentina Londono said they were worried the most recent rate rise would make their goal of owning a home in Sydney an impossible dream.
Ms Castro is among many NSW families who have said they will struggle to have a mortgage in the future as a result of rate rises and cost of living pressures.
“We are nervous,” she said.
“We don’t know if we are going to be able to do it.”
Ms Castro said she was frustrated by the recent interest rate rises, given Australians were told by RBA Governor Philip Lowe that rates would not rise until 2024.
“It’s really annoying because you make a goal and that situation can change everything,” she said.
Ms Londono said new mums faced many financial pressures.
“We are new mums, we need a house for our babies,” said Ms Londono.
“We are going to keep trying and keep trying to save money, but everything is expensive now after Covid and this situation with the rates.”
Jason Falinski, who was chairman of the House of Representatives Standing Committee of Economics until the May federal election, told The Daily Telegraph it took RBA Governor Philip Lowe too long to abandon guidance that the cash rate was “very likely” to stay at 0.1 per cent until 2024.
“I think the biggest and fairest criticism is that as of February this year, he was telling the public that they would not be seeing interest rates increases until 2024 and then he conceded under a barrage of questions (from our committee) that maybe (there would be an increase) in 2023, but only at the very end,” Mr Falinski said.
“Three months later he was increasing interest rates,” Mr Falinski said.
“There would have been a lot of people making decisions about investing in houses, shares and businesses that would have relied on that forward guidance which, at that stage, was looking pretty difficult to see how it would be right.”
Mr Falinski was responding to The Daily Telegraph’s front-page story on Tuesday, in which leading economist Warren Hogan called on Mr Lowe and the RBA board to resign over that guidance and other errors.
AMP chief economist Shane Oliver said that during the pandemic, the RBA “overdid it” with that guidance and wouldn’t want to get “wrong-footed again” by increasing rates too much more from here.
“We are already seeing signs that households are feeling stress,” Mr Oliver said.
He expected a 0.25 per cent increase next month then nothing in October.
While some economists forecast a cash rate of over 3 per cent, Mr Oliver anticipates a peak of 2.6 per cent in February next year, followed by cuts as inflation slows.
“Pushing the cash rate above 3 per cent will just risk crashing the economy unnecessarily,” Mr Oliver said. “They don’t want to get wrong-footed again.”
Moody’s Analytics economist Harry Murphy Cruise also predicts a 25-basis-point increase in September. “We expect 50-basis-point hikes to return to the board’s back pocket,” he said.
Mr Murphy Cruise said criticism that the RBA misled households was “valid” but significant subsequent events, such as Russia’s invasion of Ukraine, repeated lockdowns in China, and floods along Australia’s east coast, were “unforeseeable”.
Homeowner Gaurav Bakshi Thind said he and his family felt misled by Mr Lowe and the RBA’s statements in deciding to buy a new home.
He said he and his friends purchased homes and house and land packages, not worrying too much about debt because of public assurances given by RBA in the press.
“We are feeling betrayed by the RBA,” he said. “All of us commonly believed that RBA will not increase interest rates before 2024.”
Treasurer Jim Chalmers stayed out of the debate about the RBA’s performance.
“Our job is not to try to influence the Reserve Bank or second-guess their decisions,” he said.
“Our job is to focus on what we can responsibly influence as a new government at the national level.”
In raising rates so rapidly, the RBA is attempting to slow inflation now running at 6.1 per cent – the hottest pace since 1990, excluding the one-off impact of the GST’s introduction in 2000. The RBA has now joined the federal Treasury in expecting the CPI to hit 7.75 per cent by Christmas.
The Reserve Bank of Australia has raised the nation’s benchmark interest rate by another 0.5 of a percentage point.
It is the fourth increase since May and elevates the cash rate to 1.85 per cent, compared to 0.1 per cent in April.
If passed on by lenders, the latest jump will add $219 to monthly variable-rate repayments on the average new mortgage in NSW of $781,000.
The combined effect of the recent rate rises adds $737 a month to instalments on that average new loan.
The RBA is lifting rates in an attempt to slow inflation, which is running at its hottest pace since 1990 – excluding the one-off impact of the GST’s introduction in 2000.
As measured by the Australian Bureau of Statistics’ Consumer Price Index, inflation was up by 6.1 per cent in the year to the end of June.
The federal Treasury last week said it expects the CPI to hit 7.75 per cent by Christmas.
The RBA’s preferred measure of inflation, the CPI “trimmed mean”, rose by 4.9 per cent over the year through June.
The RBA wants the trimmed mean to be between two and three per cent.
The current inflation surge has been mainly driven by supply shortages.
Causes of those shortages include the war in Ukraine, Covid lockdowns in China and flooding in eastern Australia`.
Strengthening demand is also an increasingly significant factor behind the inflation breakout.
In a statement announcing the latest increase, RBA Governor Philip Lowe said “the board places a high priority on the return of inflation to the 2 to 3 per cent range over time, while keeping the economy on an even keel.
“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,” Mr Lowe said.
MORE ON THE WAY
He revealed that the RBA’s forecast for the CPI over 2022 is now the same as the Treasury’s, at 7.75 per cent, then “a little above 4 per cent over 2023 and around 3 per cent over 2024.”
The bank expects economic growth of 3.25 per cent this year, which again is similar to the Treasury.
The RBA believes the jobless rate will stay low, and be about 4 per cent at the end of 2024.
Mr Lowe indicated that more rate rises were on the way.
“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a preset path,” he said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
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